President Trump calls for & # 39; null & # 39; or negative prices. It may strike back

"The Federal Reserve should get our interest rates down to zero, or less," the president tweeted.

Desperate to boost growth, central bankers in Europe and Japan in recent years lowered interest rates into negative territory for the first time in modern history.

Jerome Powell, Trump's hand-picked Fed boss, has already cut interest rates to a range of 2% to 2.25%. Although many on Wall Street believe the Fed will need to continue lowering interest rates to stave off a recession, perhaps even near zero, negative interest rates will be an extreme step.

There is a growing chorus warning that the Bank of Japan and the European Central Bank's subzero regimes have recovered. Critics and some recent academic research argue that this unorthodox policy shatters banks, keeps inflation at bay and fails to grow juice. Worse, they are hurting savers and retirees in the hope of achieving a safe return on bonds.

"Negative interest rates have failed in Europe and Japan," Richard Fisher, former president of the Dallas Federal Reserve Bank, told CNN Business in an email. "They are anathema to savers and the community and regional banks that bank the average American."

How negative rates could backfire

Trump's proposal for negative prices flies in the face of the economic optimism expressed by the White House.

If the economy is so strong, why would the Fed need to resort to policies it didn't even implement during the Great Recession? The Fed lowered interest rates to almost zero in 2008 following the Lehman Brothers implosion, but never ventured into subzero territory.

Danielle DiMartino Booth, a vocal critic of modern central bank policy, warns that negative interest rates would bring the debt-dependent US economy "on its knees."

"Negative interest rates are about as un-American as you possibly can be," said DiMartino Booth, CEO and chief strategist for Quill Intelligence. "We are a nation that, for better or worse, needs credit creation to lubricate the wheels of the economy. Without this, growth would really have stopped."

Of course, no one can say with certainty exactly how negative prices in the United States would play out. And the Fed has not hinted that it will need to adopt such tactics anytime soon.

Financing a trillion dollar deficit

Trump himself was recently against the idea of ​​negative prices. He told reporters August 30 that he did not want to see negative prices in the United States.

But now Trump is expressing support for zero or negative rates as a way to "refinance" the US debt surplus, which has only grown due to tax cuts and an increase in spending under the current administration.

"INTEREST COSTS MAY BE BROUGHT DOWN," Trump tweeted.

It is true that Washington pays more to borrow than other nations, such as Germany and Japan, where interest rates are negative.

The federal government's net interest expense is expected to increase by 14% this year to $ 372 billion, according to the nonpartisan Congressional Budget Office.

Exhibit A: Deutsche Bank

The problem with negative interest rates is that they act as a direct tax on banks. And banks are the vehicles to which the central bank policy is transferred to the real economy.

Normally, banks earn interest when parking surplus reserves in central banks. But under negative prices, the opposite happens. Central banks charge lenders interest for sitting on the cash. The goal is to encourage lending – but in practice it has squeezed the profitability of the loan, which is also known as net interest income.

The European Central Bank's negative interest rate policy has intensified the disaster of Deutsche Bank ( DB ) Germany's largest bank. Deutsche Bank shares have lost about three-quarters of their value since the ECB introduced negative interest rates in 2014. The Euro Stoxx Banks index, a basket of euro area lenders, is also down sharply over that time frame.

Nevertheless, the ECB is seriously considering dropping interest rates further into negative territory.

Deutsche Bank CEO Christian Sewing warned earlier this month that another interest rate cut by the ECB "will have serious side effects."

Negative pricing advocates argue that the environment would be tougher if central bankers had not implemented this extreme policy .

Christine Lagarde, the incoming ECB president, recently said that the eurozone would be "inferior" without negative rates.

Unintended consequences

However, it is impossible to prove a counterfactual. And new academic research describes the unintended consequences of negative prices.

Bank margin and profitability were poorer in countries that adopted negative interest rates, according to a research paper published last month in the Journal of Banking and Finance and the Journal of Financial Services Research. This, in turn, has impaired banks' ability to lend.

"Our study shows that negative interest rate policy has come back," Ru Xie, associate professor of finance at the University of Bath in the United Kingdom, said in a statement last month.

The newspaper found that the "negative effect" of negative interest rates has been stronger for smaller banks. Trump has previously promised to boost America's social banks by speeding up the economy and cutting regulation.

Even Federal Reserve research has found that negative prices have not managed to raise inflation.

Research published last month by the San Francisco Fed found that market expectations for inflation "fell immediately" after the Bank of Japan announced negative interest rates in 2016.

"The reaction underscores the uncertainty of the effectiveness of negative policy rates as expansion tools when inflation expectations are rooted at low levels, "the Fed paper said.

Bringing negative prices to the United States would hurt savers and those hoping to get a solid return on fixed income. Instead of earning very little interest, they would be punished.

"The 10,000 baby boomers who turn 65 every day who want to retire would certainly be disgusted with it," Peter Boockvar, chief of investment managers at Bleakly Advisory Group, wrote in a note to clients on Wednesday.

All this suggests that the Fed would have a setback if it tried to move prices below zero. The banking industry, retirees and even mainstream economists would cry badly. And they would point to the failed experiments in Europe and Japan.